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EDSR INFORMATION 09-10-2001 INFORMATION September 3, 2001 � Minnesota Real Estate Journal i TIF: The painful side of propetly tax relief 01 THE IMPACT OF significant financial issues for developers and cities.To raise cash for a project,many 41,11P. • 6-floor' TAX REFORM ON TIF developers holding pay-as-you-go notes sold them on the secondary market after • 74,400 by Peter Berrie guaranteeing the stated principal and inter-est. 13 a c� In addition, cities that issued general U • Close p The Minnesota obligation TIE bonds for projects often Enterprises, I t 1 c. MKE In Omnibus Tax Act, insisted on developer guarantees of tax passed by the Legisla- payments,land leases or minimum assess- • $4.2 111 ture just in time to ment agreements to reduce taxpayer risk -:: for any shortfalls in future tax increment 4615 Washburn Ave. S. Guest receipts.It's a safe bet that both cities and Minneapolis, MN 55410 Columnist 1 developers are reviewing the terms of their phone: 612 860 2467 contracts to determine where they stand. avert a state shut- ==� s Fax: 612.929.7862 . Legislative remedies down, delivers his Peter Berrie To ease the pain of tax reform,the Act reform.toric property. the. authorizes cities to use several measures to ' While the Act's substantial provide relief to distressed TIF districts. property tax relief is welcome news to Cities may use these remedies to help many businesses,it may be bad news for themselves,as well as developers and oth �'real estate developers'who rely .on tax ers holding"pay-as-you-go"notes.How Ly - increment financing(In-). ever, developers have no direct access to 1 -.City Not onlywill this development tool be . these remedies,which each city may use - p at its discretion. Nevertheless, distressed 0 less effective in the future,developers who developers will want to consider strategies have guaranteed or relied upon pre reform to encourage cities to use the relief avail- ( :. tits' c t tax increment streams may be left holding able.The Act requires a city to exhaust the the bag. remedies the law provides a variety ofemedies in the order described below. remedies for cities whose TIF districts are These remedies are generally only avail- Servicing thesefa, adversely affected by the landmark reform. able for TIF obligations that were entered into before Aug. 1,2001. What exactly did the Legislature do? Pooling.The first remedy cities must use Take over,the general education levy. is"pooling,"a technique that allows cities • CORPORATE The state has assumed responsibility for to use tax increments"from other TIF dis- education funding and eliminated the gen- tricts to eliminate deficits caused by the COMMERCIAL eral education levy for local school dis- property tax reform,including shortfalls in tricts,as well as the first$415-per-pupil of the increment available for pay-as-you-go MULTI—TENA each district's referendum levy.This will notes. A city needs the approval of the dramatically lower tax increment revenues Commissioner of Revenue to utilize this r generated by school district taxes. remedy. Even if a pay-as-you-go note t • MEDICAL Impose a new state-wide property tax. states that it is only payable from incre To help offset the loss of local school dis-, ment generated by a certain TIF district, PHARMACEUTICAL trict property taxes,the state is imposing a the law allows pooling to pay it,but only new state-wide education property tax on to the extent that all other payments due BIO—TECHNI( C/I property and seasonal recreational and owing on that city's TIP bonds and LABORA7 property(cabins). other pay-as-you-go notes have been made Cut rates.The tax law compresses prop- for that calendar year. CLEJ erty class rates so that the remaining prop- Uncapping the original tax rate or erty tax burden falls more evenly on all changing,the fiscal disparities option. If a properties.The table with this article shows city uses its pooling authority to the fullest • TELECOMMUNICATIC the changes in class rates for the major extent possible and there is still a shortfall, ,, property classifications. it may exercise either or both of the folCC+MPUTER lowing options: 1110 Effect of property tax reform on TIF a) Uncapping the original tax rate.TIF MEDIA TECH laws generally do not allow cities to gen Lower property taxes mean less tax increment to pay existing TIF bonds and erate more increment by increasing the combined city,county and school district "pay-as-you-go"notes,as well as less pub tax rate beyond the combined tax rate in lic assistance for new development or rede- effect when the TIF district was formed. • INDUSTRIAL velopment projects. To make matters However, this.remedy allows a city to worse,the new state-wide property tax onMANUFACTURING C/I property will not be available for TIE. increase the"original tax rate"to the new As a result, available tax increment is combined tax rate.If the new rate is high- CORPQRATIC expected to decrease by about 30 to 40 per- er than the original tax rate (despite the cent.The exact drop for any give} 1'IN dis— trictis currently difficult to I calculate ment available for the TIF district. because it depends upon the new tax b)Fiscal disparities option. Minnesota' '#f law requires governmental units located in c apacity,of each property within a munici- _ t certain areas(generally the seven-county f p In addition,the Legislature eliminated metropolitan area and the Iron Range)to =l`r i the "LGA/HACA" penalty that forced contribute a portion of their C/I property Piq: taxes to area-wide funds that are then redis- "'- ; most cities to contribute a"local match"to r == , I TIF projects(from non-TIF sources)equal tributed among the governmental units in ;!•31.7743:1--1 I p J q order to smooth out imbalances in their rel- • I = l i to 5 percent of the tax increment.Unless r { ' 0 the city contracted to pay the local match ative tax revenues.These revenue-sharing 11,I}; mechanisms are often referred to as"Fish! t - regardless of any statutory requirement, , "' l '" ' cal Disparities"contributions. i ` ,f Ii1 this change will probably further.reduce p �� 1� , � ��' the amount of public'funds used to pay When a new TIF district is created, a ` ; city can elect to pay the fiscal disparity ;1111•111111.1111, 1, '_<" ' ; existing TIF obligations. (On the other * r �� hand,this change eliminates a disincentive contribution from all property in the city — _ _ 4 K to cities to enter into TIF deals.) instead of solely from the applicable TIF 4, Due to the reduction in tax increment, district.If a city did not do so originally,it 7276 Commerce Circle Ease most "pay-as-you-go" notes will not be may now choose that option as another it 4 C „f ,7 paid as quickly as originally projected,and remedy to make more tax increment avail- \ .1 lr) . ar _IClico �, co - � eco = o- o 'Fi Vgo �+ w �, � ,'o'`ncao ° .a a Q '77411 0 ° www .� � �� �° � w '" �� � o � °�°s2 � ..co � co ��°� C yCo m r n iti ,5 Cp GtiQp'Ca��, oN .EhaF°•oC�3 ,. y �'3cDcary '1.9, �»n "cg '7 2, - pD m C o `�° n�C�co Zwwad. tCDvi. ' ate •�' '•' '-.,6`.00CDcao t� CD a m co uo w R w co u. 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